An economy is said to be in recession if it suffers two straight quarters of negative economic growth as measured by the country’s Gross domestic Product (GDP).
The world’s third largest economy made a surprise fall into recession which many are saying was bound to happen. GDP (Gross Domestic Product) was shrinking at an annualized rate of 1.6% from July to September, far worse than economists’ forecasts for annualized growth of about 2.1%, this was followed by 7.3% fall in the second quarter which makes the situation no better. Japan a $5 trillion economy has been shrinking for the last two decades if inflation is taken into account. This is the third time Japan has gone into recession in the last four years.
When Shinzo Abe was appointed as Japanese Prime minister, he had a vision to improve Japan’s economy and launched one of the most aggressive policy moves in Japan’s history. Such has been the scale of his plan, that observers have even named it after him, calling it “Abenomics”. The value of the yen has fallen rapidly and is now at a seven year low, as a result of this program, which it was hoped will spur Japanese exports but the declining yen has served to depress the purchasing power of the Japanese, and not yet seem to be doing very much to stimulate exports. After years of large trade surpluses, Japan’s trade balance turned negative in 2011 and has remained there.
It is not that Japan has not tried measures to curb its falling economy but Economists say that Japan’s inverted age pyramid may explain why its economy has failed to respond to stimulus measures. The ageing population is dragging the economic growth. The consumption is decreasing everyday with more creditors and less debtors. The change in interest rates plays no role in such an economy as older people won’t spend more if you lower the interest rate or save more if you increase it. They hold their money in stocks rather than bonds as there is a high chance that they won’t be able to spend the returns from these risky investments.
Japan is having a huge public debt therefore the previous government had proposed a tax increase in 2012. Therefore, sales tax has increased which is supposed to be the root cause for the current recession. Above this another increase in sales tax is expected next year. Abe now faces a difficult decision: whether to address Japan’s huge public debt, now more than twice the size of its economy, by pushing ahead with what would be a deeply unpopular tax increase, or hold off and attempt to increase growth. Through he has not spoken anything on it yet but it is believed that he would oppose the increase and strengthen himself by winning an early election which he has proposed and are likely to happen in mid December to seek a mandate to delay an increase in the sales tax to 10%, scheduled for 2015.
Japan has remained a rich nation throughout its long period of little or no growth, and its 3.6 percent unemployment rate is very low by international standards. Though Abe has had a more than an year as prime minister, it is too early to call “Abenomics” a complete failure. But the GDP figures do emphasize that it won’t be easy to bring such a large economy out of recession without taking any hard decisions. Let us see what he has in store for Japan and the rest of the world now.
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